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Assessment vs Measurement
Hedge effectiveness assessment is different from
hedge effectiveness measurement. Assessment
determines whether a hedge relationship is eligible for
hedge accounting. If hedge accounting is applied then
any hedge ineffectiveness (except for a cash flow
under-hedge) must be measured and recognised in
profit or loss. The requirements of IFRS 9 and IAS 39
are very different in respect of assessment but both
require actual hedge ineffectiveness to be measured
and recognised in the same way.
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Detailed examples
The numbers used in these examples are for illustrative
purposes only.
Example 1 matched terms
Entity A plans to issue a floating rate bond on
1 July 2013. The bond will have principal of 100m
and pay interest quarterly in arrears on 1 January,
1 April, 1 July and 1 October each year up to and
including the maturity date of 1 July 2023. Interest
will be paid at a rate of 3M LIBOR + margin.
Entity A has an interest rate risk management policy
under which interest rate swaps may be used to hedge
interest rate risk. On 1 May 2013 the entity transacts a
pay fixed, receive float, forward starting interest rate
swap with the following terms:
Trade date
1 May 2013
Effective date
1 July 2013
Maturity date
1 July 2023
Notional
100,000,000
Pay
2.2%
Receive
3M LIBOR
Payment dates
Trade date 1
Effective date
1 August 2008
Maturity date
1 August 2023
Notional
100,000,000
Pay
5.2%
Receive
6M LIBOR
Payment dates
What is rebalancing?
Rebalancing refers to adjustments to the designated
quantities of the hedged item or hedging instrument
of an already existing hedging relationship for the
purpose of maintaining a hedge ratio that complies
with the hedge effectiveness requirements. This is a
new requirement that is mandatory under the
proposed IFRS 9. Rebalanced hedges are regarded as
continuing hedges for the amounts that continue to
be hedged. This is in contrast to IAS 39 where
rebalancing a hedge is elective and generally treated
as a dedesignation of the original hedge and the start
of a new hedge.
Assessing hedge effectiveness: For hedge accounting to be applied results of both prospective an retrospective testing must
be within the 80 125 per cent range. The methodology used to demonstrate hedge effectiveness must be specified at
inception and applied consistently throughout the life of the hedge. Methods of testing that would generally be acceptable
for different hedges are discussed below.
Hedge ratio: The offset threshold of 80 125 per cent restricts the hedge ratios of hedged item and hedging instrument that
would be eligible for hedge accounting. Furthermore, deliberate under-hedging in a cash flow hedge is not permitted.
Matched terms
Hedged item and hedging instrument
have matched terms and the fair value
of the hedging instrument is nil at
inception of the hedge.
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Assessing hedge effectiveness: For hedge accounting to be applied the proposals require the following:
(1) there should be an economic relationship between the hedging instrument and the hedged item;
(2) the effect of credit risk should not dominate the value changes that result from that economic relationship; and
(3) the hedge ratio should reflect the actual quantity of hedging instrument used to hedge the actual quantity of hedged item
(provided this does not deliberately attempt to achieve an inappropriate accounting outcome).
These requirements are a prospective test; retrospective hedge effectiveness is not required. The proposed IFRS 9 states that the
level of analysis required to assess compliance with its hedge effectiveness requirements may vary for different hedging
relationships. The methodology adopted must be documented at inception of a hedge and may change if the method originally
set out ceases to capture all the relevant characteristics of the hedge relationship.
Given that these requirements do not include a numerical threshold for offset, there is more scope for a qualitative assessment
of effectiveness to be sufficient to comply with the requirements. An analysis of the potential sources of ineffectiveness and the
reason for the hedge ratio used must be documented. Methods of testing that would generally be acceptable for different
hedges are discussed below. Deliberate under-hedging for a cash flow hedge to mask hedge ineffectiveness is not permitted.
Matched terms
Hedged item and hedging instrument
have matched terms and the fair value
hedging instrument is nil at inception
of the hedge.
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Alternative examples where the terms of the hedged item and hedging instrument match to varying degrees
Below is a summary of alternative examples of hedging relationships which would warrant varying degrees of analysis to demonstrate compliance
with the effectiveness requirements of IFRS 9 discussed in this paper.
Hedge type
Foreign exchange
Commodity
Hedged item
Hedging instrument:
with matched terms
Hedging instrument:
with closely matched
terms
Hedging instrument:
with significant
mismatch terms or
different underlying to
the hedged item
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Key contacts
IFRS global office
Global IFRS Leader Clients and Markets
Joel Osnoss
ifrsglobalofficeuk@deloitte.co.uk
Global IFRS Leader Technical
Veronica Poole
ifrsglobalofficeuk@deloitte.co.uk
Global IFRS Communications Director
Mario Abela
ifrsglobalofficeuk@deloitte.co.uk
Karen Higgins
Fermin del Valle
Robert Uhl
iasplus@deloitte.ca
iasplus-LATCO@deloitte.com
iasplusamericas@deloitte.com
Asia-Pacific
Australia
China
Japan
Singapore
Anna Crawford
Stephen Taylor
Shinya Iwasaki
Shariq Barmaky
iasplus@deloitte.com.au
iasplus@deloitte.com.hk
iasplus-tokyo@tohmatsu.co.jp
iasplus-sg@deloitte.com
Europe-Africa
Belgium
Denmark
France
Germany
Italy
Luxembourg
Netherlands
Russia
South Africa
Spain
United Kingdom
Thomas Carlier
Jan Peter Larsen
Laurence Rivat
Andreas Barckow
Franco Riccomagno
Eddy Termaten
Ralph ter Hoeven
Michael Raikhman
Graeme Berry
Cleber Custodio
Elizabeth Chrispin
BEIFRSBelgium@deloitte.com
dk_iasplus@deloitte.dk
iasplus@deloitte.fr
iasplus@deloitte.de
friccomagno@deloitte.it
luiasplus@deloitte.lu
iasplus@deloitte.nl
iasplus@deloitte.ru
iasplus@deloitte.co.za
iasplus@deloitte.es
iasplus@deloitte.co.uk
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